Newcrest analysts should not be fall guys

We still don’t know exactly what happened with Newcrest Mining at the start of June but we are now seeing how its implications are unfurling across the breadth of equity capital markets.

It touches on how investor relations departments steer analysts towards getting their forecasts correct, how analysts take pieces of information and turn it into their research notes and whether fund managers, when presented with information that is not public, can be trusted to take themselves out of market rather than dabble in a spot of insider trading.

Being tainted with any stain of insider trading is a prospect so worrisome for an investment bank that the merest whiff of problems with any staff member would likely see that staff member, if they are junior and reasonably replaceable, thrown out of the business or, if they are senior, put on leave pending the outcome of an investigation cast out.

Which appears to be what we have seen happen with Royal Bank of Canada. The senior analyst covering Newcrest and the head of equities were on leave earlier in the week.

It’s a funny look to be on leave during reporting season – no one on the buy or the sell side goes on holidays in February or August. They are now no longer at the company and neither is the junior analyst covering the stock.

If the investor relations team at Newcrest really did overstep continuous disclosure laws and illegally steered some analysts towards lower earnings estimates, then RBC’s employees are most likely to have only played bit roles in the saga. It’s perhaps a little harsh to say that the investment will shoot first and ask questions later but it’s probably fair to say they will ask questions with fingers poised on the trigger.

Everyone is jumpy. Look out how no one wanted to touch Newcrest shares in the immediate aftermath of the allegations of selective briefings. Shares in the gold miner had fallen to a point where brokers were suggesting it was a buy once again. Yet fund managers steered clear.

Whatever happens with the ASIC investigation, there is a real risk for the investment bank whose staff members correctly, and suspiciously, foresaw some of the problems as Newcrest that their names could get dragged into a public court case should Maurice Blackburn, Slater & Gordon and IMF take a class action.